Ct of Appeals Opinion

8/14/2019 Ct of Appeals Opinion

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INTRODUCTION

Plaintiff and appellant Raymond Edwards II (Edwards) was hired by Arthur

Andersen LLP (Andersen) in 1997. At the time he was hired, Edwards was

required by Andersen to execute a noncompetiton agreement, which prohibitedhim from working for or soliciting certain categories of Andersen clients for

limited periods after his termination. Andersen eventually went out of business

and sold its practice to various entities. Andersens Los Angeles tax practice, of

which Edwards was a part, was sold to HSBC, which hired Andersens Los

Angeles office personnel. As a condition of hire with HSBC, however, Andersen

allegedly required that Edwards obtain a release of the 1997 noncompetition

agreement. To do so, Edwards was required to execute a Termination of

Non-Compete Agreement (TONC) drafted by Andersen. That document

contained a broad release of claims against Andersen, as well as other terms

favorable to Andersen. Edwards refused to sign and his employment offer with

HSBC was withdrawn. He sued Andersen for, inter alia, intentional interference

with prospective economic advantage and violation of the Cartwright Act.

Andersens demurrer to the Cartwright Act claim was sustained on the ground

Edwards lacked standing to sue. The intentional interference claim was dismissed

as a matter of law before trial, based upon the trial courts ruling that both the

1997 noncompetition agreement and the 2002 TONC were valid.

We conclude a noncompetition agreement between an employee and

employer, prohibiting the employee from performing services for certain former

clients, is invalid under Business and Professions Code section 160001 unless it

falls within the statutory or trade secret exceptions to the statute. Such a

noncompetition agreement is invalid even if the restraints imposed are narrow and

* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinionis certified for publication with the exception of parts 1.e through 2 of theDiscussion.


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leave a substantial portion of the market open to the employee. In so holding, we

conclude the narrow restraint exception to section 16600, articulated by the

Ninth Circuit, is not a proper application of California law. Because the 1997

noncompetition agreement was invalid and against public policy under section16600, requiring Edwards to execute the TONC as consideration for release from

the noncompetition agreement constituted an independently wrongful act for

purposes of the elements of Edwardss intentional interference with prospective

economic advantage claim.

We further hold that the TONC purported to waive Edwardss Labor Code

section 2802 indemnity rights. Because Labor Code section 2802s indemnity

provisions implement public policy, requiring Edwards to waive indemnity rights

as a condition of continued employment violated public policy and constituted an

independently wrongful act for purposes of the intentional interference with

prospective economic advantage claim.

We reject Edwardss contention that a nondisparagement provision

contained in the TONC violated Labor Code section 1102.5.

In the unpublished portion of the opinion, we reject Andersens argument

that, as a matter of law (1) Edwards lacked a prospective economic relationship

with HSBC, and (2) HSBC, rather than Andersen, insisted that Edwards execute

the TONC as a condition of employment. We further conclude Andersens

demurrer to Edwardss Cartwright Act cause of action was properly sustained.

FACTUAL AND PROCEDURAL BACKGROUND

1. Edwardss employment with Andersen and the noncompetition

agreement.

In January 1997, Edwards, a certified public accountant, was hired as a Tax

Manager by Andersens Los Angeles office. In that position, Edwards provided

income, gift, and estate planning services to high net worth individuals and their

1 All further undesignated statutory references are to the Business and


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enterprises. Andersen was, at the time, one of the five major public accounting

firms providing accounting services in California. As a condition of employment

Edwards signed Andersens standard noncompetition agreement, which was

required of all Andersen managers. The relevant provisions of that agreementwere as follows:

If you leave the Firm, for eighteen months after release or resignation, you

agree not to perform professional services of the type you provided for any client

on which you worked during the eighteen months prior to release or resignation.

This does not prohibit you from accepting employment with a client.

For twelve months after you leave the Firm, you agree not to solicit (to

perform professional services of the type you provided) any client of the office(s)

to which you were assigned during the eighteen months preceding release or

resignation.

You agree not to solicit away from the Firm any of its professional

personnel for eighteen months after release or resignation.

2. Sale of Andersen assets to HSBC, the TONC, and withdrawal of

Edwardss employment offer with HSBC.

In March 2002, Andersen was indicted for obstruction of justice in

connection with the investigation of Enron Corporation by the Securities and

Exchange Commission. (See generallyArthur Andersen LLP v. United States

(2005) 544 U.S. 696 [125 S.Ct. 2129].) In June 2002, Andersen was found

guilty.2 In August 2002, Andersen announced it would cease practicing public

accounting in the United States. Andersens California accounting license was

revoked in September 2002.

During this period, beginning in approximately April 2002, Andersen

began selling portions of its practice to competitors. In May 2002, Andersen

Professions Code.2 That judgment was subsequently reversed for instructional error. (Arthur

Andersen LLP v. United States, supra, 544 U.S. at pp. 698, 708.)


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internally announced that HSBC, through a new subsidiary, Wealth and Tax

Advisory Services (WTAS), would purchase a portion of Andersens Los Angeles

tax practice, including Edwardss group. As a condition of the HSBC transaction

closing, Andersen required that all Andersen managers, including Edwards,execute the TONC in order to obtain employment with HSBC. The TONC was

crafted by Andersen.

The TONC required employees to, inter alia, (1) voluntarily resign from

Andersen; (2) release Andersen from any and all claims, including claims that

in any way arise from or out of, are based upon or relate to Employees

employment by, association with or compensation from Andersen; (3) continue

indefinitely to preserve confidential information and trade secrets except as

otherwise required by a court or governmental agency; (4) refrain from

disparaging Andersen or its related entities or partners; and (5) cooperate with

Andersen in connection with any investigation of, or litigation against, Andersen.

In exchange, Andersen would agree to accept Edwardss resignation, agree to

Edwardss employment by or affiliation with HSBC, and release Edwards from

the foregoing provisions of the 1997 noncompetition agreement.

HSBC extended an employment offer to Edwards. The offer was

contingent upon Edwards executing the TONC. Edwards was informed by

Andersen that he had to sign the TONC in order for him to be employed by

HSBC. Edwards signed and returned HSBCs written employment offer, but

refused to sign the TONC. As a result, Andersen terminated Edwardss

employment and withheld severance benefits, and HSBC withdrew its

employment offer.

3. Edwardss lawsuit and the trial courts rulings.

On April 30, 2003, Edwards filed a complaint against Andersen, HSBC,

and WTAS. The complaint alleged, inter alia, causes of action for intentional

interference with prospective economic advantage and anticompetitive business

practices under the Cartwright Act ( 16700 et seq.).


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The trial court sustained defendants demurrers to the Cartwright Act claim

without leave to amend on the ground Edwards lacked standing to bring the claim.

The trial court denied Andersens subsequent motion for summary

adjudication on Edwardss intentional interference with prospective economicadvantage claim, concluding triable issues of fact existed regarding the meaning

of the agreements, and whether the noncompetition agreement protected trade

secrets. All remaining claims against Andersen were dismissed via summary

adjudication and are not at issue here. Edwards settled with the remaining

defendants prior to trial.

Shortly before trial, Andersen moved pursuant to Code of Civil Procedure

sections 598 and 1048, subdivision (b), to sever trial on the issue of the

enforceability of the noncompetition agreement and the TONC.3 Andersen urged

that the enforceability of the agreements presented pure questions of law for

adjudication by the trial court, and contended that the provisions of both the

TONC and the 1997 noncompetition agreement were lawful.

Over Edwardss objection, the trial court granted the motion to sever and, at

the same hearing, ruled in favor of Andersen on the merits. The trial court heard

arguments from the parties, but did not take evidence. It determined, based

primarily upon its interpretation of the contractual provisions, that as a matter of

law (1) the noncompetition agreement fell within the narrow restraint exception

to section 16600; (2) the noncompetition agreement provision prohibiting Edwards

from soliciting Andersen employees was lawful; (3) the nondisparagement clause

was not illegal; and (4) the TONC did not specifically release Edwardss

3 Pursuant to Code of Civil Procedure sections 598 and 1048, subdivision(b), respectively, a trial court may order trial of an issue to precede trial of anotherissue, and may order separate trials of separate issues. (See generally 1 Wegner etal., Cal. Practice Guide: Civil Trials and Evidence (The Rutter Group 2005)

4:342 to 4:352, 4:375, pp. 4-77 to 4-79, 4-84.) Issues of law must generally betried by the court. (Code Civ. Proc., 591, 592.)


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indemnity rights. Accordingly, it granted judgment for Andersen. This appeal

followed.

DISCUSSION

1. The intentional interference with prospective economic advantageclaim.

a. Standard of review.

The parties agree that this court must independently review the trial courts

ruling on the prospective economic advantage claim, in that it was decided as a

matter of law and turned on analysis of whether certain provisions of the

noncompetition agreement and the TONC were valid and enforceable. (See, e.g.,

Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 893, fn.

6 [it is essentially a pure question of law whether [defendants] covenant not to

compete is enforceable . . . .]; Parsons v. Bristol Development Co. (1965) 62

Cal.2d 861, 865-866; McCrary Construction Co. v. Metal Deck Specialists, Inc.

(2005) 133 Cal.App.4th 1528, 1535 [it is solely a judicial function to interpret a

written instrument unless the interpretation turns on the credibility of extrinsic

evidence]; Timney v. Lin (2003) 106 Cal.App.4th 1121, 1126 [whether a contract

is illegal is generally a question of law].)

b. The elements of intentional interference with prospective economic

advantage and contentions of the parties.

The elements of a claim for intentional interference with prospective

economic advantage are not in dispute. To establish such a claim, the plaintiff has

the burden to prove the following elements: (1) an economic relationship between

plaintiff and a third party, with the probability of future economic benefit to the

plaintiff; (2) defendants knowledge of the relationship; (3) an intentional act by

the defendant, designed to disrupt the relationship; (4) actual disruption of the

relationship; and (5) economic harm to the plaintiff proximately caused by the

defendants wrongful act. (Korea Supply Co. v. Lockheed Martin Corp. (2003)

29 Cal.4th 1134, 1153-1154; Stevenson Real Estate Services, Inc. v. CB Richard


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Ellis Real Estate Services, Inc. (2006) 138 Cal.App.4th 1215, 1220 (Stevenson).)

The intentional act must be independently wrongful, i.e., wrongful by some

measure beyond the fact of the interference itself. (Della Penna v. Toyota Motor

Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393; Stevenson, supra, at p. 1220.)In other words, the act must be proscribed by some constitutional, statutory,

regulatory, common law, or other determinable standard, rather than merely be a

product of an improper, but lawful, purpose or motive (Korea Supply Co., supra,

at p. 1159 & fn. 11;Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1145; Stevenson,

supra, at p. 1220) and must be independently actionable. (Stevenson, supra,

at p. 1220.) The plaintiff need not prove that the defendant acted with the specific

intent or purpose of disrupting the plaintiffs prospective economic advantage, as

long as the defendant knew the interference was certain or substantially certain to

occur as a result of its action. (Korea Supply Co., supra, at p. 1153.)

At issue here is the third element of the tort. Edwards contends that the

wrongful act requirement was met in three respects. First, he asserts that the

noncompetition agreement was illegal under section 16600. Thus, he urges,

Andersens demand for consideration to release him from an illegal covenant not

to compete violated public policy and satisfied the wrongful act requirement.

Second, Edwards asserts that two aspects of the TONC violated California

law: (1) the TONCs broad release of Andersen amounted to a waiver of his

indemnity rights in violation of California Labor Code sections 2802, 2804, and

432.5; and (2) the TONCs anti-disparagement provision violated Labor Code

section 1102.5.

Andersen, on the other hand, contends both the TONC and noncompetition

agreements were lawful. Further, Andersen urges, one provision of the

noncompetition agreement the provision prohibiting Edwards from raiding

Andersen employees was and is not challenged as unlawful. Therefore,

Andersen argues, it could lawfully demand execution of the TONC as

consideration for release from that single covenant, even if the remaining portions


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of the noncompetition agreement were void. We consider these contentions

seriatim.

c. The noncompetition agreement was invalid under section 16600 and

therefore requiring consideration to release Edwards from it was anindependently wrongful act.

(i) Californias policy against restraint on the practice of a profession,

trade, or business.

In many states, restraints on the practice of a profession, trade, or business

are valid if reasonable. (SeeHill Medical Corp. v. Wycoff(2001) 86 Cal.App.4th

895, 900-901;Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284,

288.) California, however, rejected this approach in 1872, upon enactment of the

Civil Code. (Hill Medical Corp. v. Wycoff, supra, at p. 901;Bosley Medical

Group v. Abramson, supra, at p. 288.) Californias policy favoring open

competition is embodied in section 16600 (formerly Civ. Code, 1673) which

provides that, subject to limited exceptions, every contract by which anyone is

restrained from engaging in a lawful profession, trade, or business of any kind is to

that extent void.

California courts have consistently declared section 16600 to be an

expression of public policy which ensures that every citizen retains the right to

pursue any lawful employment and enterprise of his or her choice. (Kelton v.

Stravinski (2006) 138 Cal.App.4th 941, 946;Metro Traffic Control, Inc. v.

Shadow Traffic Network(1994) 22 Cal.App.4th 853, 859;DSa v. Playhut, Inc.

(2000) 85 Cal.App.4th 927, 933;KGB, Inc. v. Giannoulas (1980) 104 Cal.App.3d

844, 848;Application Group, Inc. v. Hunter Group, Inc., supra, 61 Cal.App.4th at

p. 900.) Thus, section 16600 sets forth the general rule in California: Covenants

not to compete are void. (Kelton v. Stravinski, supra, at p. 946;Hill Medical

Corp. v. Wycoff, supra, at p. 901.)

Several statutory exceptions to section 16600 exist. Sections 16001 and

16002 (derived from Civ. Code, 1674 & 1675) permit broad covenants not to


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compete in two narrow situations, i.e., where a person sells the goodwill of a

business and where a partner agrees not to compete in anticipation of dissolution

of a partnership. [Citation.] (Kelton v. Stravinski, supra, 138 Cal.App.4th at

p. 946;Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 288;Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407;Hill Medical Corp. v. Wycoff,

supra, 86 Cal.App.4th at pp. 901-902.) Section 16601 protects the purchaser of a

business from subsequent competition from the seller, which would reduce the

value of the property right acquired. (Monogram Industries, Inc. v. Sar Industries,

Inc. (1976) 64 Cal.App.3d 692, 701.) Section 16602 protects partners from, inter

alia, the risk that a partnerships goodwill will be diminished by competition from

a withdrawing partner. (South Bay Radiology Medical Associates v. Asher(1990)

220 Cal.App.3d 1074, 1083-1084.) Section 16602.5, enacted in 1994, provides

that a member of a limited liability company may, upon or in anticipation of

dissolution of the company, agree not to carry on a similar business within a

specified geographic area.

Additionally, it has long been recognized that section 16600 does not

invalidate covenants not to compete where necessary to protect the employers

trade secrets. (SeeMuggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239,

242 [section 16600 invalidates provisions in employment contracts prohibiting an

employee from working for a competitor after completion of his employment or

imposing a penalty if he does so [citations], unless they are necessary to protect

the employers trade secrets [citation]]; Gordon v. Landau (1958) 49 Cal.2d 690,

694;Empire Steam Laundry v. Lozier(1913) 165 Cal. 95, 100 [That equity will

always protect against the unwarranted disclosure of trade secrets and confidential

communications and the like is, of course, settled beyond peradventure.];

ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, 1022 [California

courts recognize a judicially created exception to section 16600, and will enforce a

restrictive covenant, when a former employee uses trade secrets or commits unfair

competition]; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462,


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1464;DSa v. Playhut, Inc., supra, 85 Cal.App.4th at p. 935;Loral Corp. v. Moyes

(1985) 174 Cal.App.3d 268, 275 [The misuse of trade secrets may include

solicitation of an employers customers when confidential information is

employed.]; see generally Civ. Code, 3426 et seq. [Uniform Trade Secrets Act];2 Chin et al., Cal. Practice Guide: Employment Litigation (The Rutter Group

2005) 14:310, 14:439, pp. 14-33, 14-45.)

Andersen does not contend any of the statutory exceptions apply, nor did

the trial court conclude the noncompetition agreement was necessary to protect

Andersens trade secrets. Whether the trade secret exception applied was not

resolved below and, on the facts presented here, could not properly have been

resolved adversely to Edwards without the evaluation of evidence. (See generally

Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1430.) Therefore, we

consider whether the noncompetition agreement violated section 16600.

True to the statutes mandate, California courts have held a variety of

noncompetition agreements invalid under section 16600. (See, e.g.,DSa v.

Playhut, Inc., supra, 85 Cal.App.4th at pp. 930-931 [agreement not to render

services to any person or entity in connection with competing products for one

year];Metro Traffic Control, Inc. v. Shadow Traffic Network, supra,

22 Cal.App.4th at pp. 859-860 [covenant by traffic reporters not to provide traffic

reporting services or related activities]; Kolani v. Gluska, supra, 64 Cal.App.4th at

pp. 405-407 [prohibition on competing with employer for one year within a 40-

mile radius or soliciting former employers past, current, or potential customers];

Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 292 [agreement

by physician not to open a competitive practice].)

Likewise, covenants that penalize employees for competing with a former

employer are invalid under section 16600. (Muggill v. Reuben H. Donnelley

Corp., supra, 62 Cal.2d at pp. 242-243 [forfeit of pension benefits if retiree

worked for competitor]; Gordon Termite Control v. Terrones (1978) 84

Cal.App.3d 176, 178 [contract requiring a former employee to pay $50 per


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account if he solicited former customers]; see also 2 Chin et al., Employment

Litigation, supra, 14:280, at p. 14-30.)

(ii) The noncompetition agreement was invalid under section 16600.

Applying these principles here, we conclude the noncompetition agreementwas invalid. The first challenged clause4 prohibited Edwards, for an 18-month

period, from performing professional services of the type he had provided while at

Andersen, for any client on whose account he had worked during 18 months prior

to his termination. The second challenged clause prohibited Edwards, for a year

after termination, from soliciting, defined by the agreement as providing

professional services to any client of Andersens Los Angeles office.

Similar clauses have been held invalid under section 16600. InMorris v.

Harris (1954) 127 Cal.App.2d 476, an employee agreed not to solicit, or accept

business from, any of the employers clients for a period of 10 years. The contract

provided for liquidated damages of $20 per month if the employee violated its

terms. Morris explained the contract was a partial restraint on [the former

employees] right to engage in a lawful . . . trade or business, and therefore was

invalid under section 16600. The court reasoned, The statute makes no

exception in favor of contracts only in partial restraint of trade. (Id. at p. 478

[quoting Chamberlain v. Augustine (1916) 172 Cal. 285, 289]; see Continental

Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110 [A former employee has

the right to engage in a competitive business for himself and to enter into

competition with his former employer, even for the business of those who had

formerly been the customers of his former employer, provided such competition is

fairly and legally conducted. [Citation.]];Reeves v. Hanlon, supra, 33 Cal.4th at

p. 1149 [same].)

4 Edwards does not contend the provision of the noncompetition agreementprohibiting him from soliciting Andersens employees violated section 16600, andwe do not consider the issue.


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In Thompson v. Impaxx, Inc., supra, 113 Cal.App.4th 1425, an employer

terminated an employee who refused to sign a noncompetition covenant. Theagreement would have prohibited the employee, for one year following

termination, from calling on, soliciting, or taking away any of the employers

customers or potential customers with whom the employee had had dealings. (Id.

at p. 1427.) The employer argued that the agreement was not a true covenant not

to compete, but a mere limited restrictive covenant not to solicit, which, the

employer urged, did not run afoul of section 16600. (Id. at p. 1428.) In the

employers view, it did not prevent appellant from continuing in his profession or

trade, or from working for a competitor or former customer, or from accepting the

business of former customers if they solicited him, or from soliciting former

customers with whom he had no dealings while he was respondents employee.

(Ibid.) Thompson rejected these arguments, reasoning: This clause is less

restrictive, and less anticompetitive, than the broad, traditional anticompetitive

clauses [respondents] compare it to. It is nevertheless anticompetitive why else

would they ask employees to sign it? (Id. at p. 1429.) Thompson distinguished

cases involving trade secrets, finding them inapplicable. (Id. at pp. 1429, 1431

[distinguishing, inter alia, trade route cases andLoral Corp. v. Moyes, supra,

174 Cal.App.3d 268].) The courtreiterated the rule that nonsolicitation clauses

are allowable only when they protect trade secrets or confidential proprietary

information. (Thompson v. Impaxx, Inc., supra, at p. 1431.)

The challenged clauses of Andersens noncompetition agreement suffer

from similar infirmities. The agreement prohibited Edwards from performing

work for clients of Andersens Los Angeles office and clients of any Andersen

office for whom he had performed work, for specified periods. The prohibition

applied even if the client approached Edwards and requested his services. While

the noncompetition clause was circumscribed in time and scope, it nonetheless


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substantially similar design. King concluded the contract was not invalidated by

section 16600. Gerold was not prohibited from carrying on his lawful business of

manufacturing trailers, but was barred only from manufacturing and selling trailers

of the particular design and style invented by King, who had granted the license inthe first place. (King, supra, at p. 318.)

Subsequently,Boughton v. Socony Mobil Oil Co., supra, 231 Cal.App.2d

188, addressed whether a restriction on the use of land violated section 16600.

The agreement there prohibited the plaintiff from using a parcel of land as a

gasoline service station. Boughton concluded the agreement was not void under

section 16600. (Boughton, supra, at p. 190.) First, the single restriction was

imposed, not personally on [the] plaintiffs restraining them from engaging or

carrying on any profession, trade or business but, on the use of the land . . . .

(Ibid.) Boughton went on to reason, while the cases are uniform in refusing to

enforce a contract wherein one is restrained from pursuing an entire business,

trade or profession, as falling within the ambit of section 16600 [citations], where

one is barred from pursuing only a small or limited part of a business, trade or

profession, the contract has been upheld as valid. (Boughton, supra, at p. 192.)

The plaintiffs inBoughton were not prohibited from carrying on the business of

selling petroleum products or operating a service station, except on the single

piece of property, and then only for a period of years. (Ibid.)

In Campbell v. Trustees of Leland Stanford Jr. Univ. (9th Cir. 1987) 817

F.2d 499, the plaintiff was a psychologist who had been employed by Stanford to

revise and develop a well-known vocational interest test. He challenged a

noncompetition clause that prohibited him from preparing or publishing any

similar work that might injure sales of the test. (Id. at pp. 501-502.) Relying on

Boughton, the Ninth Circuit reasoned, Even though the California Legislature

rejected the common-law rule that reasonable restraints of trade are generally

enforceable, it did not make all restrictions unenforceable. Section 16600 only

makes illegal those restraints which preclude one from engaging in a lawful


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profession, trade, or business. (Id. at p. 502.) It was a question of fact whether

the clause completely precluded the plaintiff from preparing vocational interest

exams. (Id. at p. 503.) He was therefore entitled to a trial on that issue. (Id. at

pp. 502-503.)Ten years later, in General Commercial, supra, 126 F.3d 1131, General

Commercial Packaging (GCP) subcontracted with TPS to work for GCPs major

customer, the Walt Disney Companies. TPS agreed that for one year after

termination of the contract, it would not to work directly for, or solicit, Disney or

any other company which GCP had introduced and contracted to TPS. The Ninth

Circuit concluded the contract was valid unless it completely restrain[s] TPS

from plying its trade or business. [Citations.] (Id. at p. 1134.) The court

recognized that a contract does not have to impair a partys access to every

potential customer to contravene section 16600. Because most businesses cannot

succeed with only a handful of customers, a contract can effectively destroy a

signatorys ability to conduct a trade or business by placing a substantial segment

of the market off limits. (Ibid.) The agreement at issue in General Commercial

did not violate section 16600 because it allowed TPS to work for any firm with

which it had a preexisting relationship, and limited TPSs access to only a narrow

segment of the market. (Ibid.)

This line of reasoning was continued inInternational Business Machines

Corp. v. Bajorek(9th Cir. 1999) 191 F.3d 1033 (Bajorek) andLatona v. Aetna

U.S. Healthcare Inc. (C.D. Cal. 1999) 82 F.Supp.2d 1089. InBajorek, the

agreement at issue required that an employee forfeit his stock option profits if he

worked for a competitor within six months after leaving IBM. (Bajorek, supra, at

p. 1035.) Bajorekconcluded the provision excluded the employee from one

small corner of the market because the restriction was limited only to

competitors, for a six month period. Therefore, it did not violate section 16600.

(Bajorek, supra, at p. 1041.) BajorekmentionedMuggill v. Reuben H. Donnelly

Corp., supra, 62 Cal.2d 239, 243 in which our Supreme Court held section 16600


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invalidated a similar provision. Bajoreknonetheless concluded the issue was

controlled by its own decisions in, inter alia, General Commercial and Campbell.

Latona applied the narrow restraint standard, but concluded that the

noncompetition agreement at issue was not narrowly drawn. (Latona v. AetnaU.S. Healthcare Inc., supra, at pp. 1094-1095.)

We believe the Ninth Circuits narrow restraint gloss on section 16600 is

a misapplication of California law when applied to an employees noncompetition

agreement. In our view, section 16600 prohibits noncompetition agreements

between employers and employees even where the restriction is narrowly drawn

and leaves a substantial portion of the market available for the employee.

When interpreting a statute, we follow the Legislatures intent, as

exhibited by the plain meaning of the actual words of the law . . . . (Stephens v.

County of Tulare (2006) 38 Cal.4th 793, 801.) We first examine the words

themselves because the statutory language is generally the most reliable indicator

of legislative intent. [Citation.] The words of the statute should be given their

ordinary and usual meaning and should be construed in their statutory context.

[Citation.] (Fitch v. Select Products Co. (2005) 36 Cal.4th 812, 818.) Here, the

statutory language is unambiguous, stating: Except as provided in this chapter,

every contract by which anyone is restrained from engaging in a lawful profession,

trade, or business of any kind is to that extent void. ( 16600.) If the Legislature

had intended section 16600 to apply only to restraints which were unreasonable or

overbroad, it could certainly have included language to that effect.

Nor do the analyses in King v. Gerold, supra, 109 Cal.App.2d 316, and

Boughton v. Socony Mobil Oil Co., supra, 231 Cal.App.2d 188, the cases upon

which the narrow restraint doctrine was originally based, provide persuasive

support for it. While not expressly based upon the trade secret exception, King v.

Geroldobviously falls within its reach; the appellants transgression in that case

was not simply manufacturing house trailers, but manufacturing trailers using a


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design substantially similar to the respondent inventors. (King v. Gerold, supra,

at p. 318.)

InBoughton, the restriction was not upon the plaintiffs practice of a

profession or trade, but on the use of the land, a distinction which formed the cruxof the courts holding. (Boughton v. Socony Mobil Oil Co., supra, 231 Cal.App.2d

at p. 190.) As support for its alternative holding that a covenant not to compete is

not invalid if the prohibition is only upon a small or limited part of a business,

trade or profession (id. at p. 192),Boughton relied upon King v. Gerold. But, as

noted, King does not stand for such a broad proposition. To the contrary, as

applied to an employees noncompetition agreementBoughtons analysis

contradicts Chamberlain v. Augustine, supra, 172 Cal. 285. In Chamberlin, a

foundry employee sold stock5and, as part of the sale agreement, covenanted not to

become directly or indirectly interested in any similar foundry business, except as

a molder or laborer. (Id. at pp. 286-287.) The appellants contended the contract

was not void under former Civil Code section 1673 (the predecessor to section

16600) because it permitted the defendant to work as a foundry laborer or molder.

Chamberlain reasoned, The obvious answer to this is the very language of

section 1673 . . . . (Id. at p. 288.) The statute makes no exception in favor of

contracts only in partial restraint of trade. (Id. at p. 289.)

Further, the presence of express exceptions ordinarily implies that

additional exceptions are not contemplated. [W]here exceptions to a general rule

are specified by statute, other exceptions are not to be implied or presumed unless

a contrary legislative intent is evident. [Citation.] (People v. Standish (2006) 38

5 In 1916, when Chamberlain was decided, the statutory exception now

embodied in section 16601 applied only to the sale of a business, not a stock sale.It was amended in 1945 to apply when a shareholder sells or disposes of all his orher shares in a corporation. (See generallyHill Medical Corp. v. Wycoff, supra,86 Cal.App.4th at pp. 902-903;Bosley Medical Group v. Abramson, supra, 161


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Cal.4th 858, 870;Rojas v. Superior Court(2004) 33 Cal.4th 407, 424.) The

Legislature has created three express statutory exceptions to section 16600,

suggesting it did not intend to create a fourth implied exception for reasonable,partial, or narrow restraints. (Kolani v. Gluska, supra, 64 Cal.App.4th at p. 407

[the statutory exceptions contained in sections 16601 and 16602 reinforce the

conclusion that covenants not to compete in contracts other than for sale of

goodwill or dissolution of partnership are void]; Thompson v. Impaxx, Inc.,

supra,113 Cal.App.4th at p. 1428 [same].) The sole nonstatutory exception, for

trade secrets, was originally rooted in equity. (Empire Steam Laundry v. Lozier,

supra,165 Cal. at pp. 100-102;Morris v. Harris, supra, 127 Cal.App.2d at p. 478

[Equity recognizes a fiduciary duty of an employee after leaving [an] employers

service not to take an unfair advantage of trade secrets and customers lists.].)

No such considerations apply to allow an employer who is generally in a far

superior bargaining position than a prospective or terminated employee to

impose restrictions on the employees future livelihood. To the contrary, public

policy and natural justice require that equity should also be solicitous for the right

inherent in all people, not fettered by negative covenants upon their part to the

contrary, to follow any of the common occupations of life. (Continental Car-Na-

Var Corp. v. Moseley, supra, 24 Cal.2d at p. 110.) The interests of the

employee in his own mobility and betterment are deemed paramount to the

competitive business interests of the employers, where neither the employee nor

his new employer has committed any illegal act accompanying the employment

change. [Citation.] (Reeves v. Hanlon, supra, 33 Cal.4th at p. 1151.)

In fact, policy concerns strongly militate against adoption of the Ninth

Circuits approach. Under the narrow restraint doctrine, employers have an

incentive to draft noncompetition agreements that push the envelope of the

Cal.App.3d at pp. 288-289.) The statute was amended in 2002 to substitute, inter


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narrowness requirement. Noncompetition agreements burden a terminated

employee with the task of guessing, at his or her peril, whether a court might find

particular restrictions sufficiently narrow or overly broad. The question of

whether a limited restriction falls within the narrow restraint rule will often behighly fact specific, depending upon the economics of particular industries and

markets. It is not difficult to imagine situations in which making only a few

clients off limits would greatly limit competition, whereas under different

circumstances a much broader restriction could leave a substantial portion of the

market open. Employees are likely to assume contractual terms proposed by their

employer are legal and, in any event, will be reluctant to commit the energy and

resources to challenging a noncompetition agreement in court. (SeeLatona v.

Aetna U.S. Healthcare Inc., supra, 82 F.Supp.2d at p. 1096;DSa v. Playhut, Inc.,

supra, 85 Cal.App.4th at p. 935 [ We foresee situations where the uninformed

. . . employee will forego legitimate [employment] rather than assume the risk of

expensive, time-consuming litigation [by the former employer]. ];Baker Pacific

Corp. v. Suttles (1990) 220 Cal.App.3d 1148, 1155.) Perhaps most troubling,

prospective future employers may be reluctant to hire an employee who has signed

a questionable noncompetition agreement, in order to avoid the expense and

energy of defending a lawsuit in which they are likely to be joined. [Citations.]

(Latona v. Aetna U.S. Healthcare Inc., supra, at pp. 1096-1097.)

Finally, if further support for rejection of the narrow restraint doctrine was

necessary, it is found in the historical context surrounding enactment of former

Civil Code section 1673, the precursor to current section 16600. Wright v. Ryder

(1868) 36 Cal. 342, explained the common law rule as it stood a few years before

enactment of former Civil Code section 1673. Wrightexplained that under the

early English common law, as a matter of public policy, all contracts were void

which in any degree tended to the restraint of trade, even in a particular,

alia, ownership interest for shares.


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circumscribed locality, either for a definite or unlimited period. (Wright v. Ryder,

supra, at p. 357.) Later, after competition had become more robust, the stringent

rule was relaxed; [i]nstead of denouncing as void all contracts in restraint of

trade, the rule, as relaxed, tolerated such as were restricted in their operationswithin reasonable limits. (Ibid.) Thus, prior to enactment of former Civil Code

section 1673, an agreement inpartial restraint of trade, restricting it within

certain reasonable limits or times, or confining it to particular persons, would, if

founded upon a good and valuable consideration, be valid. (Wright v. Ryder,

supra, at p. 358.)

Four years later, the Legislature enacted former Civil Code sections 1673,

1674, and 1675, the precursors to sections 16600, 16601, and 16602. The Code

Commissioners comment to former Civil Code section 1673 observed, Contracts

in restraint of trade have been allowed by modern decisions to a very dangerous

extent. (Italics added.) As an example, the Code Commissioner citedDunlop v.

Gregory (1851) 10 N.Y. 241, a New York case which had held a contract not to

exercise a trade or carry on a business in a particular place might be upheld if it

was reasonable and useful, and the restraint was no larger than necessary for the

protection of the covenantee. (Id. at p. 244.) The Code Commissioners

comments suggest the Legislature, in enacting former Civil Code section 1673,

intended to apply a more stringent standard than that described by the Wright v.

Rydercourt.6 The comments of the Code Commission are entitled to significant

weight. (Dieckmann v. Superior Court(1985) 175 Cal.App.3d 345, 353.)

6

California courts and commentators have made a variety of observationsabout the nature of the common law rule and the effect of enactment of formerCivil Code sections 1673 through 1675, now sections 16600 through 16602. (See,e.g., South Bay Radiology Medical Associates v. Asher, supra, 220 Cal.App.3d atp. 1080 [section 16600 embodies the common law prohibition against restraints ontrade];Hill Medical Corp. v. Wycoff, supra, 86 Cal.App.4th at pp. 900-901 [atcommon law restraints on the practice of a profession were valid if reasonable;California rejected the common law rule of reasonableness in 1872, upon


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In sum, we conclude the narrow restraint doctrine is a misapplication of

California law. Noncompetition agreements are invalid under section 16600 even

if narrowly drawn, unless they fall within the statutory or trade secret exceptions.

Thus, the noncompetition agreement at issue here was invalid and violated

enactment of former Civil Code section 1673];Bosley Medical Group v.Abramson, supra, 161 Cal.App.3d at p. 288 [same]; Vacco Industries, Inc. v. VanDen Berg (1992) 5 Cal.App.4th 34, 47-48 [at common law, restraints againstcompetition were valid to the extent they reasonably protected a valid interest ofthe party in whose favor the restraint ran; sections 16600 and 16601 arecodifications of the common law]; Centeno v. Roseville Community Hospital(1979) 107 Cal.App.3d 62, 68 [section 16600 is basically a codification of the

common law relating to contracts in restraint of trade];Monogram Industries, Inc.v. Sar Industries, Inc., supra, 64 Cal.App.3d at p. 698 [section 16601 is acodification of the rule of reasonableness in connection with the sale of abusiness]; Kaplan v. Nalpak Corp. (1958) 158 Cal.App.2d 197, 200 [at commonlaw a contractual restriction upon competition was valid where it was incident tothe sale of a business and reasonable in duration and territorial scope];Howard v.

Babcock(1993) 6 Cal.4th 409, 416 [common law rule of reason applies toevaluate noncompetition agreements under the section 16602 exception]; Swensonv. File (1970) 3 Cal.3d 389, 396 [the section 16602 exception embodies thecommon law concept of reasonableness]; 1 Witkin, Summary of Cal. Law (10th

ed. 2005) Contracts, 579, pp. 634-635 [section 16600 is basically a codificationof the common law].) These authorities may easily be harmonized. As we haveobserved, the common law rule changed over time. (Wright v. Ryder, supra, 36Cal. at p. 357.) Fairly read, the foregoing authorities suggest section 16600embodies the original, strict common law antipathy toward restraints of trade,while the section 16601 and 16602 exceptions incorporated the later common lawrule of reasonableness in instances where those exceptions apply.

We also observe that in the context of construing exclusivity contracts,courts have stated that section 16600 and similar statutes should be construed In the light of reason and common sense so as to uphold reasonable limited

restrictions. [Citations.] (Centeno v. Roseville Community Hospital, supra, 107Cal.App.3d at pp. 68-70 & fn. 2 [hospital contract to exclusively use one radiologygroup did not violate section 16600]; Keating v. Preston (1940) 42 Cal.App.2d110, 122-123 [lease providing for lessees exclusive right to operate a restaurant ina hotel did not violate former Civil Code section 1673].) These cases did notinvolve employee noncompetition contracts and are not germane to our analysis.We express no opinion on the operation of section 16600 outside the context ofemployee noncompetition agreements.


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Californias public policy, unless, on remand, Andersen proves the trade secret

exception applies.

(iv) Requiring execution of the TONC as consideration for release from the

noncompetition agreement violated public policy and constituted an independently

wrongful act for purposes of the third element of Edwardss intentional

interference claim.

Having concluded the noncompetition agreement was invalid, we further

hold Andersens action of demanding execution of the TONC as consideration for

release of the noncompetition agreement was an independently wrongful act for

purposes of the third element of Edwardss intentional interference with

prospective economic advantage claim.7 We have previously held that an

employer cannot lawfully make the signing of an employment agreement, which

contains an unenforceable covenant not to compete, a condition of continued

employment . . . . [A]n employers termination of an employee who refuses to

sign such an agreement constitutes a wrongful termination in violation of public

policy. (DSa v. Playhut, Inc., supra, 85 Cal.App.4th at p. 929.) InDSa, the

employer fired an employee because he refused to sign a confidentiality agreement

that contained an illegal covenant not to compete. (Id. at p. 929.) We reasoned,

California law would protect plaintiff if defendants sought to overreach by trying

[to] enforce the covenant not to compete, and California . . . law will also protect

7 Andersen argues that it did not require HSBC to insist on the TONC as a

condition of hiring Edwards. Instead, Andersen posits, it was HSBC that insistedon releases from the noncompetition agreement before hiring Andersen personnel.Andersen may or may not be correct, but as we discuss further in the unpublishedportion of the opinion, the answer to this question is one of disputed fact that could


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him from a termination of his employment brought on by his refusal to sign an

agreement containing the illegal covenant. (Id. at pp. 931-932.)

Similarly, inBaker Pacific Corp. v. Suttles, supra, 220 Cal.App.3d 1148,

asbestos removal workers were required, as a condition of employment, to sign a

document releasing the building owner from liability. Workers who refused to

sign were denied employment. (Id. at pp. 1150-1151.) Bakerheld the release

violated public policy in that it purported to exempt the employer from

responsibility for fraud and intentional acts in contravention of Civil Code section

1668.8

(Id. at p. 1154.) Because the release violated Civil Code section 1668 and

public policy, requiring prospective workers to sign it as a condition of

employment was contrary to law. (Ibid.)

Here, of course, Edwards was not terminated for refusing to sign a

noncompetition agreement. Instead, he allegedly was required by Andersen, as a

condition of his new employment with the purchaser of Andersens Los Angeles

tax practice, to execute a broad release of claims against Andersen as

consideration for Andersens release of the invalid noncompetition agreement. In

essence, Andersen enforced the noncompetition agreement by demanding

consideration for it. While the chain of events is more complicated and attenuated

than inDSa andBaker Pacific Corp., this circumstance makes no difference to

our analysis. Those authorities stand for the proposition that conditioning

employment on an employees execution of a contract that violates public policy is

against public policy. Using the invalid noncompetition agreement to coerce

not have been, and was not, decided by the trial court in the procedural frameworkused below.8 Civil Code section 1668 provides: All contracts which have for their

object, directly or indirectly, to exempt anyone from responsibility for his ownfraud, or willful injury to the person or property of another, or violation of law,whether willful or negligent, are against the policy of the law.


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Edwards into forfeiting rights was no less wrongful than terminating an employee

who refuses to sign such an agreement. To hold otherwise would be to elevate

form over substance and ignore the practical realities of the situation.

Andersen argues that one clause of the noncompetition agreement was not

and is not challenged, i.e., Edwardss agreement not to solicit away from the

Firm any of its professional personnel for eighteen months after release or

resignation, (the anti-raiding provision.)9 (See generallyLoral Corp. v. Moyes,

supra, 174 Cal.App.3d at p. 280 [anti-raiding provision was not invalid under

section 16600].) Andersens theory is that it was entitled to consideration for

releasing Edwards from the anti-raiding provision, even if the noncompetition

provisions were invalid; therefore its insistence on the TONC was proper.

Andersen points out that the trial court concluded that while Andersen was out

there trying to sell a portion of its businesses to folks, [the anti-raiding] provision

still had some value. Not much, I dont know, but some. Andersen rhetorically

asks, Must Andersen have relinquished concededly valid rights in exchange for

nothing from Edwards?

We are not entirely persuaded that the trial courts assumption about the

value of the anti-raiding provision, made in an evidentiary vacuum, was correct.

A contract is valid even if supported by insignificant consideration, and the giving

up of a legal right may constitute sufficient consideration. (1 Witkin, Summary of

Cal. Law (10th ed. 2005) Contracts, 205, 211, pp. 239-240, 246-247.)

9

Andersen states that other provisions of the noncompetition agreementwere admittedly lawful. However, the noncompetition agreement contained onlytwo provisions in addition to the noncompetition clauses: the anti-raidingprovision, and Edwardss agreement not to remove, retain, copy, or useAndersens or clients property or confidential, privileged, or proprietaryinformation. The TONC did not purport to release Edwards from the latterprovision. Therefore, the confidentiality provision does not figure into ouranalysis.


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However, [i]t is well settled that something which is completely worthless cannot

constitute a valid consideration. [Citations.] (Grant v. Aerodraulics Co.

(1949) 91 Cal.App.2d 68, 76; Walters v. Calderon (1972) 25 Cal.App.3d 863,874; 1 Witkin, supra, 205, pp. 239-240.) Andersen was going out of business

and selling off its practice groups. As it was ceasing operations, it is unclear

whether the anti-raiding provision retained any value. (See generally Cubic Corp.

v. Marty (1986) 185 Cal.App.3d 438, 448 [the adequacy of consideration is to be

determined in light of the conditions existing at the time a contract is made].)

But assuming for purposes of argument that the anti-raiding provision

retained some minimal value at the relevant time period, Andersens argument is

nonetheless unpersuasive. Andersens argument implicitly rests on the assumption

that the invalid noncompetition provisions can be severed from the anti-raiding

provision. We and other courts have rejected this approach. As we have

explained, an employer cannot lawfully make an employees signing of an

employment agreement containing an unenforceable covenant not to compete a

condition of continued employment, even if such agreement contains choice of

law or severability provisions which would enable the employer to enforce the

other provisions of the employment agreement. (DSa v. Playhut, Inc., supra, 85

Cal.App.4th at p. 929; see alsoLatona v. Aetna U.S. Healthcare Inc., supra, 82

F.Supp.2d at p. 1097.)

Andersen argues this principle should not apply under the facts presented

here, where the employee had already signed the agreement. However, such an

approach ignores the realities of the situation. As we have observed, the anti-

raiding provision had minimal value, given Andersens rapid demise. Certainly

HSBC, the purchaser of Andersens Los Angeles tax practice, could have had no

real interest in Andersen employees being released from the anti-raiding provision.

That clause applied only to prevent a former Andersen employee from soliciting

currentAndersen employees, not HSBC employees. Yet, HSBC could, and


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allegedly did, have an interest in its prospective employees being released from

the noncompetition provisions. By using the TONC as the instrument to release

both the noncompetition and anti-raiding provisions, Andersen could ensure it

would be able to insist on the TONC as a condition of the sale. Severing thenoncompetition and anti-raiding provisions under these circumstances would not

effectuate the public policy contained in section 16600.

In any event, Andersen never offered to release Edwards from the invalid

provisions of the noncompetition agreement without consideration. Edwards was

required to sign the TONC in order to free him from the noncompetition

provisions, as well as the anti-raiding provision. Andersen cannot now be relieved

of liability on the ground that if it had sought consideration for the anti-raiding

provision only, Edwards would have no grounds to object. (Cf.Latona v. Aetna

U.S. Healthcare Inc., supra, 82 F.Supp.2d at p. 1097; Thompson v. Impaxx, Inc.,

supra, 113 Cal.App.4th at p. 1431.)

d. Validity of the TONCs release and nondisparagement provisions.

Edwards next contends that two provisions of the TONC violated

California law, and requiring him to execute the TONC as a condition of his hire

with HSBC was an independently wrongful act for purposes of the third element

of his intentional interference with prospective economic advantage claim.

(i) The TONC wrongfully required release of Edwardss statutory right to

indemnity, in violation of public policy.

As noted, the TONC contained a broad release in favor of Andersen.

Subdivision (1)(d) of the TONC provided that Edwards released and discharged

Andersen from any and all actions, causes of action, claims, demands, debts,

damages, costs, losses, penalties, attorneys fees, obligations, judgments,

expenses, compensation or liabilities of any nature whatsoever, in law or equity,

whether known or unknown, contingent or otherwise, that Employee now has,

may have ever had in the past or may have in the future against any of the

Released Parties by reason of any act, omission, transaction, occurrence, conduct,


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circumstance, condition, harm, matter, cause or thing that has occurred from the

beginning of time up to and including the date hereof, including, without

limitation, claims that in any way arise from or out of, are based upon or relate to

Employees employment by, association with or compensation from [Andersen] orany of its affiliated firms, except for claims (i) arising out of [Andersens]

obligations set forth in this Agreement or (ii) for any accrued and unpaid salary or

other employee benefit or compensation owing to Employee as of the date

hereof.

The trial court concluded, On the issue of the waiver of indemnity, the

release is a typical broad release. It doesnt specifically anywhere request that

[indemnity rights] be waived. And . . . the Labor Code pretty much tells us that

right cant be waived. As a matter of law, any provision in the release that

attempts to waive it would be void, but I dont even think we have to reach it

because I dont interpret the release to be requiring Mr. Edwards to give up his

rights as a matter of law. Andersen argues that the trial court was correct, and the

TONC did not purport to waive Edwardss indemnity rights.

1. Discussion.

Labor Code section 2802, subdivision (a), provides for an employees right

to indemnity. That subdivision reads: An employer shall indemnify his or her

employee for all necessary expenditures or losses incurred by the employee in

direct consequence of the discharge of his or her duties, or of his or her obedience

to the directions of the employer, even though unlawful, unless the employee, at

the time of obeying the directions, believed them to be unlawful. Labor Code

section 2802 requires an employer to indemnify an employee for all expenses and

losses incurred in direct consequence of the discharge of his duties. (Jacobus

v. Krambo Corp. (2000) 78 Cal.App.4th 1096, 1100; see alsoDevereaux v.

Latham & Watkins (1995) 32 Cal.App.4th 1571, 1583; Plancarte v. Guardsmark

(2004) 118 Cal.App.4th 640, 647-648; Grissom v. Vons Companies, Inc. (1991) 1

Cal.App.4th 52, 55.)


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Labor Code section 2804 makes all contracts waiving the benefits of Labor

Code section 2802 null and void. (Liberio v. Vidal (1966) 240 Cal.App.2d 273,

276, fn. 1; 1 Chin et al., Employment Litigation, supra, 3:47, at p. 3-6.1.) It

provides: Any contract or agreement, express or implied, made by any employeeto waive the benefits of this article or any part thereof, is null and void, and this

article shall not deprive any employee or his personal representative of any right

or remedy to which he is entitled under the laws of this State.

We respectfully disagree with the trial courts conclusion that the TONCs

release did not waive Andersens Labor Code section 2802 indemnity rights. The

plain language of the TONC clearly purports to do so. It covers any and all

actions, causes of action, claims, demands, debts, damages, costs, losses, penalties,

attorneys fees, obligations, judgments, expenses, compensation or liabilities of

any nature whatsoever, whether known or unknown, past, present, and future.

It expressly applies to all claims that in any way arise from or out of, are based

upon or relate to Employees employment. The provision did not expressly

reference indemnity rights, but it did not have to: They were necessarily

encompassed within the clear terms of the broad release. A broadly worded

release covers all claims within the scope of the language, even if the particular

claim is not expressly listed. (SeeBardin v. Lockheed Aeronautical Systems Co.

(1999) 70 Cal.App.4th 494, 505.) Indeed, Labor Code section 2802 requires

indemnification for all necessary expenditures or losses incurred by the employee

in direct consequence of the discharge of his or her duties (italics added). Losses,

costs, and expenses of any nature whatsoever are expressly listed in the release.

It is difficult to imagine a theory under which indemnity rights would notbe

covered, given this broad language.

Nor does the provision except indemnity rights, as suggested by Andersen.

The only items excepted were claims arising out of Andersens obligations under

the TONC, and for any accrued and unpaid salary or other employee benefit or

compensation owing to Employee as of the date hereof. An indemnity right


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simply cannot be characterized as accrued and unpaid salary. Indemnification

does not fit neatly into the category of an employment benefit. (See generally City

and County of San Francisco v. Callanan (1985) 169 Cal.App.3d 643, 648 [A

conventional definition of the colloquial phrase [fringe benefit] generally meansan employment benefit (as a pension, a paid holiday, or health insurance) granted

by an employer that involves a money cost without affecting basic wage rates.

[Citation.]) Assuming arguendo that indemnity was encompassed within

compensation, the exception was limited to compensation owing as of the date

the TONC was executed, improperly excluding any future indemnity claims. (See

County of Riverside v. Loma Linda University (1981) 118 Cal.App.3d 300, 315-

316 [A cause of action for indemnity does not accrue or come into existence until

the indemnitee has suffered actual loss for which he is entitled to indemnity,

either through payment of a court judgment or through settlement.];Lincoln v.

Narom Development Co. (1970) 10 Cal.App.3d 619, 627.) Further, as noted, the

release expressly exempted two types of claims but did not contain a similar

exception for indemnification, suggesting no additional exceptions were intended.

It is axiomatic that Labor Code sections 2802 and 2804 articulate the

fundamental public policy of California. The obvious purpose of Labor Code

section 2802 is to protect employees from suffering expenses in direct

consequence of doing their jobs. (Grissom v. Vons Companies, Inc., supra, 1

Cal.App.4th at pp. 59-60.) Labor Code section 2802 shows a legislative intent

that duty-related losses ultimately fall on the business enterprise, not on the

individual employee. (Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th

55, 74, fn. 24.) Numerous provisions of the Labor Code were established to

protect workers and hence have a public purpose. (Henry v. Amrol, Inc. (1990)

222 Cal.App.3d Supp. 1, 6; cf. Grier v. Alameda-Contra Costa Transit Dist.

(1976) 55 Cal.App.3d 325, 335 [full payment of wages is an important state policy

enacted for the protection of employees generally].) Clearly, Labor Code section

2802 inures to the benefit of the public generally, not merely to a particular


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employer or employee. (Cf.Mannetter v. County of Marin (1976) 62 Cal.App.3d

518, 525 [there is a strong public policy to indemnify employees for loss resulting

from industrial injury]; Sav-On Drug Stores, Inc. v. Superior Court(2004) 34

Cal.4th 319, 340 [Labor Code section 1194, providing that an employee whoagrees to work for less than the minimum wage may recover in a civil action,

confirms a clear public policy for the benefit of workers]; Fittante v. Palm Springs

Motors, Inc. (2003) 105 Cal.App.4th 708, 715-716, 718 [Labor Code section 970,

prohibiting an employer from fraudulently inducing an employee to move to

accept employment, was enacted to vindicate a public policy].) Likewise, Labor

Code section 2802s indemnity requirement inures to the public benefit.

That Labor Code section 2802 implements public policy is further

demonstrated by Labor Code section 2804, which voids any agreement to waive

the protections of Labor Code section 2802. Any one may waive the advantage

of a law intended solely for his benefit. But a law established for a public reason

cannot be contravened by a private agreement. (Civ. Code, 3513.) By

declaring a contract to waive the rights given by Labor Code section 2802 void,

the Legislature adopted a rule of public policy. (See generally South Bay

Radiology Medical Associates v. Asher, supra, 220 Cal.App.3d at p. 1080.) In

short, Labor Code sections 2802 and 2804 embody Californias strong public

policy favoring indemnification of employees for claims and liabilities arising

from the employees acts within the course and scope of their employment. (See 1

Chin et al., Employment Litigation, supra, 3:1, at p. 3-1.) Because employee

indemnity rights under Labor Code section 2802 implement public policy and

inure to the public benefit, forcing an employee to waive his or her statutory rights

violates public policy. (Cf.DSa v. Playhut, Inc., supra, 85 Cal.App.4th at p. 929;

Baker Pacific Corp. v. Suttles, supra, 220 Cal.App.3d at p. 1154.)

According to Edwardss theory, he was prohibited by Andersen from

obtaining employment with HSBC because he refused to sign the TONC.

Andersen could not make Edwardss future employment contingent on his waiving


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his statutorily mandated indemnity rights. (SeeDSa v. Playhut, Inc., supra, 85

Cal.App.4th at pp. 929-934 [an employer cannot lawfully make the signing of a

contract that violates public policy a condition of continued employment];Baker

Pacific Corp. v. Suttles, supra, 220 Cal.App.3d at p. 1154 [requiring prospectiveemployees to sign an illegal agreement as a condition of employment is contrary

to law].) Accordingly, Andersens insistence upon the indemnity waiver as a

condition of Edwardss future employment violated public policy and was an

independently wrongful act for purposes of the third prong of Andersens

intentional interference with prospective economic advantage claim.10

Andersen contends the release clause was not wrongful because any waiver

of Edwardss right to indemnification would have been ineffective as a matter of

law. While Andersen is correct that a release of Edwardss indemnity rights

would have been void, courts have rejected the view that requiring an employee to

10 Edwards urges that Andersens conduct constituted an independentlywrongful act because it violated Labor Code section 432.5. We are unpersuaded.Section 432.5 provides, No employer, or agent, manager, superintendent, orofficer thereof, shall require any employee or applicant for employment to agree,

in writing, to any term or condition which is known by such employer, or agent,manager, superintendent, or officer thereof to be prohibited by law. Violation ofLabor Code section 432.5 is a misdemeanor. (Lab. Code, 433.) Penal statutesare strictly construed. (Smith v. Superior Court(2006) 39 Cal.4th 77, 92; Peopleex rel. Lungren v. Superior Court(1996) 14 Cal.4th 294, 312-313; Wooten v.Superior Court(2001) 93 Cal.App.4th 422, 429.) Labor Code section 432.5 issuch a statute, in that violation is punishable by imprisonment in a county jail notexceeding six months, by a fine not exceeding $1,000, or both. (Lab. Code, 23.)By its express terms, Labor Code section 432.5 applies only where the term orcondition is prohibited by law. Labor Code section 2804 makes a contract to

waive indemnity rights null and void. Void means of no legal effect; null.(Blacks Law Dictionary (8th ed. 2004) p. 1604.) Prohibit means to forbid bylaw. (Ibid. at p. 1248.) Labor Code section 2804 does not forbid a purportedwaiver of an employees indemnity rights; it makes such a waiver void as againstpublic policy. Thus, although we hold that conditioning employment on anemployees purported waiver of his or her Labor Code section 2802 indemnity


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sign an ineffective agreement is not wrongful simply because the provision would

not be enforced. (Baker Pacific Corp. v. Suttles, supra, 220 Cal.App.3d at p. 1154

[finding argument circular and unintelligible].) AsLatona v. Aetna U.S.

Healthcare Inc., supra, 82 F.Supp.2d 1089 cogently explained in the context ofnoncompetition agreements, defendants argument, that the Agreement cannot

violate public policy because . . . it is simply a nullity, ignores the realities of the

marketplace. As between [the employer] and an individual employee, the

company is in an infinitely better position to acquaint itself with the applicable

laws, and to know whether the non-compete clause violates section 16600.

Employees, having no reason to familiarize themselves with the specifics of

Californias employment law, will tend to assume that the contractual terms

proposed by their employer (especially one of Aetnas magnitude) are legal, if

draconian. Furthermore, even if they strongly suspect that a non-compete clause is

unenforceable, such employees will be reluctant to challenge the legality of the

contractual terms and risk the deployment of Aetnas considerable legal resources

against them. Thus, the in terrorem effect of the Agreement will tend to secure

employee compliance with its illegal terms in the vast majority of cases. (Id. at

p. 1096; see alsoBaker Pacific Corp. v. Suttles, supra, at p. 1155 [We cannot

expect workers generally to be cognizant of judicial decisions concerning the

interpretation of exculpatory provisions within releases. We reject the concept

that a worker, compelled by economic necessity to secure employment, can be

thus coerced into signing sweeping agreements exculpating various responsible

entities in the uninformed hope the agreement will not be enforced by the

courts.].)

rights violates public policy and is a wrongful act, such a waiver is notprohibited within the narrow meaning of Labor Code section 432.5.


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(ii) The TONCs nondisparagement provision did not violate Labor Code

section 1102.5.

Edwards next contends that the TONCs nondisparagement provision was

likewise void as against public policy. Paragraph 1(c) of the TONC provided:Employee shall not disparage [Andersen] or any of its affiliated firms or any of

their respective present or former partners, managers or employees (AA Party);

provided, however, that this Section 1(c) shall not prevent Employee from

(i) responding to comments made by any AA Party about Employee if Employee

reasonably believes such comments were disparaging to Employee or (ii) making

statements about an AA Party in connection with the defense of a claim made

against Employee by a third party. (Underscoring omitted.)

Edwards contends the nondisparagement clause violated Labor Code

section 1102.5. That section, a whistleblower protection provision, provides, in

pertinent part, An employer may not make, adopt, or enforce any rule, regulation,

or policy preventing an employee from disclosing information to a government or

law enforcement agency, where the employee has reasonable cause to believe that

the information discloses a violation of state or federal statute, or a violation or

noncompliance with a state or federal rule or regulation. (Lab. Code, 1102.5,

subd. (a).) Subdivision (b) of the statute prohibits retaliation against an employee

for disclosing information to a government or law enforcement agency, where the

employee has reasonable cause to believe the information discloses a violation of

state or federal law.

The trial court concluded that the TONCs nondisparagement clause was

not unlawful, in that it did not require any illegal conduct on Edwardss part, did

not preclude him from responding to governmental inquiries, and did not preclude

him from reporting crimes to the government.

Edwards contends the TONCs nondisparagement provision violated Labor

Code section 1102.5 because it would have chilled employee disclosures of

wrongdoing by Andersen and would have precluded employees from reporting


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illegal conduct to the government. Therefore, he urges, Andersens alleged

conduct of requiring that he sign the TONC as a condition to his hire by HSBC

amounted to an independently wrongful act for purposes of his intentional

interference with prospective economic advantage claim. Andersen counters thatsuch clauses are commonplace and innocuous, and cannot be construed to prevent

an employees cooperation with the government.

As Andersen suggests, nondisparagement clauses appear to have become

fairly common, both to protect employers and employees when an employment

relationship ends. (SeeE.E.O.C. v. Severn Trent Services, Inc. (7th Cir. 2004) 358

F.3d 438, 440; Cooper Tire & Rubber Co. v. Farese (5th Cir. 2005) 423 F.3d 446,

457.) Certainly, we discern nothing inherently unlawful about a party generally

agreeing not to disparage another.

On the other hand, to the extent a nondisparagement clause can be

understood to prohibit truthful comments, it cannot hinder an employees

cooperation with government officials. For example, such an agreement cannot

trump a subpoena. (E.E.O.C. v. Severn Trent Services., Inc., supra, 358 F.3d at

pp. 442-443[suits attempting enforcement of nondisparagement clauses as against

government subpoenas would be beyond frivolous; they would be obstructions of

justice].) Further, attempted enforcement of such an agreement to prevent

employees from voluntarily approaching a government or law enforcement agency

to report a violation of law as delineated in Labor Code section 1102.5 would be

against public policy. (See Cooper Tire & Rubber Co. v. Farese, supra, 423 F.3d

at p. 457 [Arguably, it would be against public policy for an employer to sue a

former employee for violating a nondisparagement clause by disclosing the

employers illegal activities.].) Labor Code section 1102.5 reflects the broad

public policy interest in encouraging workplace whistle-blowers to report unlawful

acts without fearing retaliation. (Green v. Ralee Engineering Co. (1998) 19

Cal.4th 66, 77; Colores v. Board of Trustees (2003) 105 Cal.App.4th 1293, 1301-


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1302, fn. 1.) Indeed, an uncodified preamble to a 2003 amendment to Labor Code

section 1102.511 provides, The Legislature finds and declares that unlawful

activities of private corporations may result in damages not only to the corporation

and its shareholders and investors, but also to employees of the corporation andthe public at large. The damages caused by unlawful activities may be prevented

by the early detection of corporate wrongdoing. The employees of a corporation

are in a unique position to report corporate wrongdoing to an appropriate

government or law enforcement agency. [] The Legislature finds and declares

that it is the public policy of the State of California to encourage employees to

notify an appropriate government or law enforcement agency when they have

reason to believe their employer is violating laws enacted for the protection of

corporate shareholders, investors, employees, and the general public. (Stats.

2003, ch. 484, 1; see generally Carter v. California Dept. of Veterans Affairs

(2006) 38 Cal.4th 914, 925 [an uncodified section is part of the statutory law and

may be used as an aid in construing a statute].)

Despite the strong public policies which Labor Code section 1102.5 was

clearly meant to vindicate and the breadth of the nondisparagement provision at

issue, we conclude Labor Code section 1102.5 has no application here. This is not

an action to enforce an overbroad, nondisparagement agreement, and there is no

claim Edwards was retaliated against for disclosing information. By its plain

language, Labor Code section 1102.5 only prohibits an employer from making,

adopting, or enforcing any rule, regulation, or policy preventing an employee

from disclosing information . . . . (Lab. Code, 1102.5, subd. (a).) The TONC

provision cannot reasonably be described as a rule, regulation, or policy within the

meaning of the statute. A policy is a settled or definite course or method

11 Labor Code section 1102.5 was amended in 2003 to add a number of

whistleblower-related provisions and additional penalties. (Campbell v. Regents


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adopted and followed by a government, institution, body, or individual.

(Lockheed Aircraft Corp. v. Superior Court(1946) 28 Cal.2d 481, 485-486

[construing identical rule, regulation or policy language contained in Labor

Code section 1101].) A rule is defined as, inter alia, a prescribed, suggested, orself-imposed guide for conduct or action: a regulation or principle and an

accepted procedure, custom or habit having the force of a regulation. (Websters

3d New Internat. Dict. (2002) p. 1986.) A regulation is an authoritative rule or

principle dealing with details of procedure. (Id. at p. 1913.)

In short, Labor Code section 1102.5, subdivision (a) clearly refers to

workplace rules and regulations meant to govern employees conduct. The

TONC, on the other hand, was an instrument proposed at the end of Edwardss

tenure with Andersen, and did not constitute a rule or policy governing his conduct

as an Andersen employee. Therefore, by allegedly insisting Edwards sign the

TONC as a condition of hire with HSBC, Andersen did not violate Labor Code

section 1102.5. Inclusion of the nondisparagement provision in the TONC did not

constitute an independently wrongful act for purposes of Edwardss intentional

interference with prospective economic advantage claim.

[[START NONPUBLISHED PORTION OF OPINION]]

e. Whether there was a prospective economic relationship between HSBC

and Edwards, and whether HSCB or Andersen required the TONC as a condition

of Edwardss employment, were questions of fact.

Andersen asserts that we may uphold the trial courts ruling for two

independent reasons: Edwards cannot satisfy the first element of the claim, i.e., he

lacked a prospective economic relationship with HSBC; and HSBC, not Andersen,

insisted on releases from the noncompetition agreement before hiring Andersen

personnel. Both these contentions turn upon disputed issues of material fact and

were therefore properly denied on summary adjudication by the trial court.

of University of California (2005) 35 Cal.4th 311, 329, fn. 5; Stats. 2003, ch. 484,


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Summary judgment or adjudication is granted when a moving party

establishes the absence of a triable issue of material fact and the right to entry of

judgment as a matter of law. (Code Civ. Proc., 437c, subd. (c); Pacific Shore

Funding v. Lozo (2006) 138 Cal.App.4th 1342, 1348-1349.) We review the trialcourts decision de novo. (Pacific Shore Funding v. Lozo, supra, at p. 1349;

Nathanson v. Hecker(2002) 99 Cal.App.4th 1158, 1162;Drouet v. Superior Court

(2003) 31 Cal.4th 583, 589.)

(i) Whether Edwards had a prospective economic relationship with HSBC

turned on the resolution of triable issues of material fact.

As noted supra, the first element of an intentional interference with

prospective economic advantage claim is an economic relationship between

the plaintiff and some third party, with the probability of future economic benefit

to the plaintiff . . . . (Korea Supply Co. v. Lockheed Martin Corp., supra,

29 Cal.4th at p. 1153; Westside Center Associates v. Safeway Stores 23, Inc.

(1996) 42 Cal.App.4th 507, 521-522.) The law precludes recovery for overly

speculative expectancies by initially requiring proof the business relationship

contained theprobability of future economic benefit to the plaintiff.

[Citations.] Although varying language has been used to express this threshold

requirement, the cases generally agree it must be reasonably probable that the

prospective economic advantage would have been realized but for defendants

interference. [Citation.] (Westside Center Associates v. Safeway Stores 23, Inc.,

supra, at p. 522.) [T]he interference tort applies to interference with existing

noncontractual relations which hold the promise of future economic advantage. In

other words, it protects the expectation that the relationship eventually will yield

the desired benefit, not necessarily the more speculative expectation that a

potentially beneficial relationship will eventually arise. (Id. at p. 524, fn.

omitted.)

2, 7.)


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The trial court held that there is a sufficient relationship between plaintiff

and HSBC for purposes of this claim (indeed, the mere fact that an offer was made

triggered plaintiffs termination). Andersen disagrees, urging that Edwardss

employment offer, being conditioned on his execution of the TONC, was not anexisting relationship. Summary adjudication was properly denied. There was

evidence from which a jury could find Edwardss relationship with HSBC was not

speculative. It was certainly more than a hope: HSBC was slated to employ the

personnel of Andersens Los Angeles tax practice. A memorandum of

understanding between HSBC and Andersen listed Edwards as an employee

HSBC intended to hire. Andersen cites no authority persuading us that a

conditional employment offer like the one here cannot qualify as an existing

relationship.

Andersen also argues that the timing of the employment offer precludes a

finding of an existing relationship. Andersen points out that to prove the existing

relationship prong, the relationship must have existed at the time of the

defendants allegedly tortious acts, lest liability be imposed for actually and

intentionally disrupting a relationship which has yet to arise. [Citation.]

(Westside Center Associates v. Safeway Stores 23, Inc., supra, 42 Cal.App.4th at

p. 526.) Andersen argues that it imposed the TONC on June 18, 2002, before

Edwards received the first letter offering him employment with HSBC on June 27.

But the evidence cited -- in one case an e-mail message dated June 18, 2002 --

clearly establishes that it was already contemplated, indeed expected, that the

employees would be begin[ing] employment with a new employer, and

extensive procedures had already been put into place to facilitate that transition.

HSBCs first offer letter to Edwards was dated simply June, 2002. Further,

Edwards persuasively argues that Andersens wrongful conduct is not defined

solely by the delivery of the TONC, but instead encompassed a series of actions

that ultimately resulted in HSBCs revoking his employment offer. Because

triable issues of material fact exist, the trial court properly denied summary


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adjudication on the intentional interference with prospective economic advantage

claim.

(ii) Whether Andersen or HSBC required Edwards to sign the TONC in

order to be hired by HSBC presents a triable issue of material fact.The trial court also apparently rejected Andersens argument that HSBC,

rather than Andersen, required Edwards to execute the TONC as a condition of

employment. The trial court was correct; this issue turns on disputed issues of

material fact.

The TONC stated that Andersen and WTAS had entered into an agreement

which provides, in part, that [WTAS] shall offer employment to Employee. It

further provided, completing the transactions contemplated by the WTAS

agreement at this time maximizes value for the benefit of [Andersen], which

benefit may not be realized without Employee separating from [Andersen] on the

terms set forth in [the TONC] and affiliating withWTAS. (Italics added.)

Evidence in the record shows Andersen, not HSBC, proposed and

generated the TONC. Andersen admits it drafted the TONC. One of the

conditions to closing recited in the acquisition agreement between Andersen,

WTAS, and HSBC was that each Restricted Employee shall have delivered to

Andersen a duly executed copy of the Termination of Non-Compete Agreement.

HSBCs counsel testified at her deposition that, We required a release. To the

extent there was other information or conditions in the form, it was not our

requirement. She further testified the TONC was Andersens form. . . . this was

a form that they had used in prior transactions and that it had already been

negotiated to the extent Andersen would agree to any changes and that the rest of

it was nonnegotiable. HSBCs counsel understood that with respect to

provisions within [the TONC] that didnt affect HSBC, they were nonnegotiable.

HSBCs concern and only concern was that the employees be released from their

restrictive covenants. To the extent there were other provisions in the document

provided they didnt have any impact on HSBC, we didnt need to have those


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provisions in the document. Andersens president and chief operating officer

testified that Andersen desired to maximize its return on all its assets, and that the

noncompetition covenants had economic value. An Andersen internal

memorandum informed employees that In order for you to begin employment atyour new employer we must first terminate your employment with Andersen.

The memorandum then explained that one of the steps required to terminate you

in the Andersen system was execution of the TONC.

From this evidence, a jury could infer that the TONC requirement was

included in the purchase agreement by Andersen, not HSBC. Andersen points to

no undisputed evidence establishing that the TONC was mandated by HSBC

rather than Andersen. Given this state of affairs, it is a disputed issue of fact

whether Andersen extracted from HSBC

Documents

Ct of Appeals Opinion